ADVANCED PETROLEUM ECONOMICS:

An independent E&P firm signs a contract on 1/2/2017 for a petroleum lease/block in the deep offshore
water in the Gulf of Guinea. On signing the contract, the contractor pays $100 million in bonus. During the
first two years, the contractor conducts exploration activities at a cost of $80 million each year. A
commercial oil field was discovered with the first well completed on Dec 31, 2019. But it took two years to
develop the field at a cost of $100 million in year one and $150 million in year two. The size of discovery is
200 MMbbl.

A: PRODUCTION FORECAST EXERCISE:

Assuming the instantaneous production at the beginning of the third year after signing the lease is 1000
BOPD and production from the field peaks at a rate of 50,000 Bbl/day at the beginning of 2023 declining
exponentially after two years on the plateau at an effective decline rate of 12.5% per year. Layout the
appropriate production profile for this field and the corresponding production forecast for the evaluation
of this field. The field is expected to be sold to a smaller independent firm in 20 years after production
began. What is the estimated reserves remaining as at the time the field is sold? Present your forecast
graphically showing plots of annual production and cumulative production on a single graph.

B: CASH FLOW MODELING: EXERCISE:

It is estimated that the yearly field operating expenditure is 10% of the total cumulative gross revenue plus
a fixed operating cost of 5 percent of CAPEX per year. The MOD oil price is $55 per barrel; the contractor
must pay a one-time $15 million production bonus when the cumulative production from the field reaches
10 million barrels and the contractor also begins to pay 12.5% royalty to the host government out of the
gross production after cumulative production hits 10 million barrels and 17.5 percent after it reaches 20
million barrels. Further, for petroleum taxation purposes, 70 percent of investments will be capitalized and
depreciated by 5-year SLD schemes, the remaining 30 percent is expensed. Build a cash flow model in
preparation to evaluating the profitability of this venture by assuming a Federal Income Tax Rate of 30
percent.

C: DISCOUNTED CASH FLOW MODELLING EXERCISE:

Generate appropriate economic and system indicators to assess the profitability of this project. How
sensitive is the profitability of this venture to tax rate, instantaneous production rate, the peak production
rate and the current oil price? Would the economic analysis have made any difference if the depreciation
scheme applied only to development and facility expenditures only? Perform sensitivity analysis of your
evaluation metrics to oil price, discount rate and tax using your model (Mian, 2011v1).

D: STOCHASTIC CASH FLOW MODELLING EXERCISE:

Identify at least three cash flow model inputs that are significantly stochastic in your opinion. Define
appropriate probability distribution to convert these inputs to random variables. Estimate the host
governments take (HGT) statistic and the earning power of the investment on this project with 50 percent
degree of certainty using a stochastic spreadsheet modeling tool of your choice.

E: Prepare at least a ten page full report to VP Corporate Planning Division, who wants a p80 IRR of at least
25%. Provide arguments for the merit for against the financing of this project!

Report is due on or before May 6, 2017 to wumi.iledare@uniport.edu.ng

Dr. Wumi Iledare, Professor Emeritus of Petroleum Economics, LSU Center for Energy Studies USA & Visiting Professor of Petroleum Economics, AUST, Abuja, NIGERIA. April, 2017 Pg1.